Relationship of auditing standards to detection of fraud;

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Relationship of Auditing Standards To Detection of Fraud
George R. Catlett
Arthur Andersen & Co.
The accounting profession is facing a wide diversity of difficult challenges. One of the current problems facing CPAs in public practice is how to achieve a proper understanding on the part of the public and others of 1) the relation­ship
of auditing standards to the detection of fraud, and 2) the responsibilities of auditors for the detection of fraud.
Nature of Fraud
Dishonesty and deceit have always been present to some degree not only in the business community but in all walks of life. However, fraud in business enterprises has been increasing in recent years. While most managements and employees are honest, there are enough material cases of dishonesty to cause concern among independent auditors.
Fifteen years ago, most accounting firms had only an occasional fraud case, and many of those were not of any great significance. Today, with fraud cases becoming more common, and with investigations by governmental agencies and resulting litigation exploding in all directions, this disturbing trend is becoming a major factor in the operation of accounting firms. Some of the reasons for this situation are interesting, but time limitations do not permit us to discuss that topic.
What constitutes fraud is not always clear. In cases of bankruptcies and failures, fraud is sometimes alleged when what really may have occurred was bad management decisions and/or adverse business conditions, with a resulting loss of money by investors and creditors. The tendency to allege "fraud" under these circumstances frequently seems to be irresistible. In any event, what is referred to as "fraud" in some cases may not actually be "fraud."
Legal liability of independent auditors for alleged negligence and other deficiencies in their work has many ramifications. Mr. A. A. Sommer, Jr., now a Commissioner of the SEC, discussed this area at the Symposium here in 1972. The number of court cases involving the question of whether and under what circumstances an auditor may have legal liability is still somewhat limited; but more such cases will probably go to trial in the next few years, and the guide­lines
may become clearer than they are at the present time.
Many different kinds and magnitudes of fraud exist, with some not affecting the financial statements at all or only in a minor way, while others have a
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